Federal Court Overturns EPA's Interpretation of a "Single Source" for Title V Air Permitting

When the Title V permitting program was created it was sold as a way to simplify complex air permitting.  U.S. EPA said that it would allow large facilities to aggregate all their air pollution sources under one permit.  EPA indicated this would make it easier for businesses to track their requirements.

What emerged from this "simplified" permitting process was, in fact, permits that were hundreds of pages along.  In addition, new reporting requirements were added onto businesses.  Also, businesses were required to submit an annual certification of compliance which had to be attested to by a responsible official with the company.

The cumbersome nature of the Tittle V permitting process coupled with the new regulatory requirements created a significant incentive for businesses to avoid Title V permitting.  Under Title V, every "major source" of air pollution is required to obtain a Title V permit.  EPA defines "major source" as any facility that is a source of air pollutants that "directly emits, or has the potential to emit, one hundred tons per year of any pollutant."  See, 42 U.S.C. Section 7602(j).

The most common way to avoid Title V for facilities that have a potential emit above 100 tons per year (tpy) is by placing enforceable restrictions (through permitting) that cap emissions below the trigger threshold of 100 tpy.  These permits are referred to as "synthetic minor" permits.  Facilities that cannot reduce actual emissions below 100 tpy can't use this method to avoid Title V.

What happens when two air sources, owned by the same company, exceed 100 tpy? 

EPA will evaluate whether the sources should be treated as a single source for Title V purposes.  EPA's guidance in this area is not straightforward and has led to creative interpretations aggregating sources together.

What Constitutes a "Single Facility" for Purposes of Title V Permitting

Under EPA rules, multiple pollutant-emitting activities can be aggregated together and considered a single source for purposes of determining whether the 100 tpy threshold for Title V permitting has been exceeded. Under EPA rules, a single stationary source for Title V purposes must satisfy all of the following factors: (1) the sources are under common control; (2) they are located on one or more contiguous or adjacent properties; and (3) belong to the same industrial grouping.  40 C.F.R. Section 71.2.1

In guidance issued by EPA, the Agency stated that single stationary source determinations should be made on a case-by-case basis and that "in some cases, 'proximity' may serve as the overwhelming factor."   See, Memorandum from Gina McCarthy, Assistant Adm'r, to Reg'l Admr's Regions I-X (Sept. 22, 2009). 

EPA Finds Summit's Production Plant and Wells One Facility for Purposes of Title V

While EPA guidance says proximity should be the key factor, EPA appears to not always follow its own guidance.  Such was the case in its determination with regard to Summit Petroleum Company ("Summit"). 

EPA found that Summit's natural gas sweetening plant and the associated production wells were one facility for purposes of Title V. Summit’s plant “sweetens” the “sour” gas from approximately one hundred sour gas production wells by removing hydrogen sulfide so that the gas can be used. Summit owns all of the production wells and the subsurface pipelines that connect each of the wells to the sweetening plant. The wells themselves are located over an area of approximately forty-three square miles at varying distances from the plant—from five hundred feet to eight miles away

EPA said that Summit's plant, wells and flares worked together as a single unit that "together produced a single product."  EPA said Summit could not produce any evidence that the plant and wells were not "truly interdependent."  EPA concluded that given the functional interrelationship, Summit's plant and wells should not be considered separate emissions sources.

Summit challenged the EPA interpretation arguing that EPA's interpretation ignored the plain language in the regulations that calls for sources to be "adjacent."  The Sixth Circuit Court, in a 2-1 decision, agreed with Summit after reviewing the regulatory history and EPA guidance. The Court said EPA may not ignore the term "adjacent' when making determinations as to whether to aggregate related sources.  The Court found that the wells distance from the plant - from five hundred feet to eight miles- meant the source were not "adjacent' for purposes of treating them as a single source under Title V.  See, Summit v. EPA, Nos. 09-4348; 10-4572 (6th Cir. Aug. 7, 2012).

Conclusion

The Sixth Circuit decision goes a long way in reducing the reach of EPA in trying to aggregate separate emission sources for purposes of Title V.  Based upon the ruling, a company with operations in different locations that are related to one another may be able to still avoid Title V permitting so long as there is some geographic separation between the sources.

Key Lessons for Businesses from a Rare State Court Air Regulatory Decision

You don't often get State court decisions on environmental law, especially on air permitting issues.  Recently, the 10th Appellate Court in Columbus issued a decision that has at least a few major implications for businesses in Ohio.  State of Ohio ex rel Ohio Atty. Gen. v. The Shelly Holding Co, et. al.,

There is a good summary of the facts behind the case and a discussion of the legal conclusions the Court reached on the blog American College of Environmental Lawyers by longtime environmental attorney Mike Hardy.  I won't repeat the history of the case here.  Rather, let me highlight the major implications from the ruling for businesses that operate air sources within Ohio.

Ohio EPA's Permit Backlog

Up until 2008, air sources were first issued a permit to install (PTI) to construct and start-up.  Then the source had to obtain a permit to operate (PTO) for continued operation.  With nearly 70,000 regulated air sources Ohio EPA had thousands of backlogged PTO applications.

To address the issue going forward, the law was changed in June 2008 and new sources could obtain a combined PTIO permit.  This reduced the need for two permits from 2 to 1 and extended the effectiveness from five years (PTO) to ten years (PTIO). (Click here for Ohio EPA chart on difference between the programs).

This was a good fix going forward, but what about businesses who were stuck with the system that existed prior to 2008?  The Court's ruling on potential to emit (see below) shows the danger of the Agency's failure to act on a timely basis.  Shelly submitted timely applications, but was placed at a major disadvantage because the Agency failed to act on those applications on a timely basis.

Key Lesson #1:  Even if a business fulfills its obligations on a timely basis it still can be placed at a regulatory disadvantage based on the Agency's failure to act.

What is a Source's Potential to Emit

A source of air pollution (boiler, paint line, etc.) must obtain a federal permit if it exceeds certain thresholds (100/250 tons per year).  There is a huge incentive for businesses to avoid obtaining a federal permit because they impose more onerous requirements. 

In determining whether a sources exceeds federal permitting thresholds, EPA looks at its design capacity, not its actual day-to-day emissions.  Design capcity is referred to as "potential-to-emit." (PTE).

Unless enforceable restrictions exist on design capacity, PTE is calculated using worst case assumptions- source operation 7 days a week, 365 days per year and 8,760 hours per year.  Enforceable restrictions include:

  1. air pollution control equipment;
  2. restrictions on hours of operation; and/or
  3. restrictions on the type or amount of material combusted, stored or processed.

The 10th Appellate Court rejected Ohio EPA's claim that the restrictions must be federally enforceable (federal rule or permit).  The Court held state permits were deemed sufficient for purposes of enforceability.

However, it rejected Shelly's claim that voluntary restrictions were sufficient, even if those restrictions are in permit applications pending Ohio EPA review.  Until the permit is actually issued, the Court held they don't have sufficient legal effectiveness to avoid the worst case PTE calculation of 365 days a year.

Key Lesson  #2:  You can't rely on permit applications as enforceable restrictions to avoid federal permits. 

Ohio EPA's Failure to Follow the Law

Shelly was hurt by the failure of Ohio EPA act on its PTO applications.  Ohio law imposes an obligation on the Agency to issue permits within 180 days. 

The Court noted Ohio EPA failure to act on a timely basis and held that in considering penalties Ohio EPA failure to act "should not be held against the owner or operator."    An interesting sentence in the ruling-  "After the 180-day deadline passed, the burden falls on Ohio EPA to meet its obligation under law; and owner cannot be penalized for the Ohio EPA's failure."

I can envision that sentence being quoted in future briefs by lawyers whose clients may face penalties partially as a result of Ohio EPA failure to perform its mandated functions on time.

Key Lesson #3:  Don't forget Ohio EPA has legal obligations.  Their failure to meet those obligations could be a basis for a legal defense.

Stack Testing to Determine Compliance

Stack tests are samples of air emissions what a source is operating.  The accuracy of stack tests to determine whether a source is in compliance with its emission standards in a permit has been long debated. 

Businesses have argued that stack tests don't represent normal conditions and are only "a snap shot in time."  Regulators argue that stack tests are a valid way of determining compliance.  Until a source passes a stack test (emissions are within limits), the assumption is the source is operating out of compliance with permit standards and subject to penalties.  Any associated penalties should be based on the time from the failed stack test until the source passes a subsequent stack test.

Key Lesson #4:  To avoid large civil penalties, business should act very quickly to make adjustments following a failed stack test.

 

EPA Announces Risky Regulatory Approach on Climate Change

On September 30th, U.S. EPA announced the release of its proposed rule regulating emissions of greenhouse gases (GHGs) from large industrial sources. The proposal represents a risky move by U.S. EPA in the event climate change legislative efforts fail and U.S. EPA is forced to move forward with the rules.  The risk is two fold: 1) U.S. EPA's action is grounded in questionable legal authority; and 2) the action starts a process that eventually leads to regulation of small sources and issuance of millions of federal air permits.

Under the proposal, at least initially, only large industrial facilities that emit at least 25,000 tons of GHGs a year will be required to obtain construction and operating permits covering their emissions.  The construction permits will come under U.S. EPA's New Source Review Program (NSR) and the operating permits will come under its Title V Program (Title V). 

What does triggering NSR mean for these sources?

Once a source triggers NSR, it must go through a lengthy and complicated permitting review process.  The review is designed to identify the best available control technology (BACT) which will reduce emission of the pollutant, in this case greenhouse gases (GHGs). 

Unlike the proposed cap and trade legislation, each and every source triggering NSR will be required to go through this case by case review process and install controls. Under cap and trade, sources can either install controls or cover their emission by purchasing pollution permits (allowances).  Therefore, cap and trades results in more cost effective reduction in emissions than a simple mandate on all sources.

What does coverage under Title V mean for these sources?

The Title V permit is meant to cover large sources that typically have multiple air permits or are subject to a variety of air pollution regulations.  The purpose of Title V is to consolidate all these requirements into a single permit.  Some Title V permits can be as large as 500 pages or more. Under the proposed rule, sources that emit more than 25,000 tons per year of CO2 or CO2 equivalent emissions (CO2e) will be required to obtain Title V permits. 

What doesn't make sense is that some sources may only be covered by Title V permits because of their GHG emissions.  This could result in the strange outcome of Title V permits that are virtually blank because those sources have very little other applicable air pollution regulations. The effectiveness of such an approach has to be questioned.

Key Issue: Established Thresholds Triggering NSR or Title V 

Why is the EPA's action risky?  The agency is proposing the "tailoring" thresholds applicable to GHG emissions that trigger regulation:

  • 25,0000 tons of CO2e for new sources triggers NSR
  • an emission increase of between 10,000 and 25,000 tons of CO2e from existing sources following a modification to the facility will trigger NSR
  • Sources with 25,000 tons of CO2e will be required to obtain Title V permits after five years

Only problem is the Clean Air Act specifies the following thresholds:

  • 100 tons from 28 specified industries trigger NSR for new sources
  • 250 tons from all other types of sources trigger NSR for new sources
  • 100 tons from any source triggers Title V

EPA notes that without modification of the thresholds 40,000 NSR permits would be triggered each year, where currently only 300 are triggered.  Also, 6,000,000 sources would fall under the Title V program whereas the program only currently covers 15,000 sources.

Its a pretty basic tenant of law that Agencies must follow statutory law and cannot re-write them using regulations.  Former Air Administrator Jeff Holmstead commented on this issue in the New York Times

"Normally, it takes an act of Congress to change the words of a statute enacted by Congress, and many of us are very curious to see EPA's legal justification for today's proposal,"

Major Risk #1-  EPA could lose its legal argument that it has authority to raise the thresholds

How does the EPA claim it has the legal authority to raise the thresholds?  Under the doctrines of "absurd results" and "administrative necessity."  Both legal doctrines are similar in that Courts have recognized the ability of agencies to depart from the plain meaning of a statute if application would result in "absurd results" or there is an "administrative necessity." 

EPA explains why these doctrines should apply in the preamble to the rule:

[T]o apply the statutory PSD (NSR) and title V applicability thresholds to sources of GHG emissions would bring tens of thousands of small sources and modifications into the PSD program each year, and millions of small sources into the title V program.  This extraordinary increase in the scope of the permitting programs, coupled with the resulting burdens on the small sources and on the permitting authorities, were not contemplated by Congress in enacting the PSD and title V programs.  Moreover, the administrative strains would lead to multi-year backlogs in the issuance of PSD and title V permits, which would undermine the purposes of those programs.  Sources of all types- whether they emit GHGs or no- would face long delays in receiving PSD permits, which Congress intended to allow construction or expansion.  Similarly, sources would face long delays in receiving Title V permits, which Congress intended to promote enforceability.  (preamble pg. 20)

EPA goes on to state in the preamble that courts are "reluctant" to invoke the "absurd results" doctrine "precisely because it entails departing from the literal application of statutory provisions."  However, EPA asserts this is "one of the rare cases" where it should apply. (preamble pg. 63)

If the Court disagrees with EPA's legal rationale, the rule would be rendered illegal and sent back to U.S. EPA.  However, even without the "tailoring rule" NSR and title V would apply to GHG emissions. 

EPA has stated its intent to move forward with other climate change regulations, such as the light-duty vehicle rule (which EPA says will be finalized no later than March 2010).  After these rules are finalized, GHGs are considered a "regulated pollutant."  If the attempt to raise the thresholds is thrown out, GHG status of a "regulated pollutant" would mandate application of the 100/250 ton NSR and 100 tons thresholds set forth in the Clean Air Act.

For this reason EPA's proposed rule represents a major gamble.  Perhaps that is the leverage they are looking for in the climate change legislative negotiations.  However, if things fall apart EPA may have crossed the point of no return.

Major Risk #2:  The thresholds are temporary in nature resulting in regulation of much smaller sources in the future. 

In U.S. EPA's Press Release Administrator Jackson states

“This is a common sense rule that is carefully tailored to apply to only the largest sources -- those from sectors responsible for nearly 70 percent of U.S. greenhouse gas emissions sources. This rule allows us to do what the Clean Air Act does best – reduce emissions for better health, drive technology innovation for a better economy, and protect the environment for a better future – all without placing an undue burden on the businesses that make up the better part of our economy.”

Jackson made the announcement regarding the proposed rule during a speech to the Governor's Global Climate Summit.  In her remarks she made the following statement:

Defenders of the status quo are going to oppose this with everything they have. Very soon, we will hear about doomsday scenarios – with EPA regulating everything from cows to the local Dunkin’ Donuts. But let’s be clear: that is not going to happen. We have carefully targeted our efforts to exempt the vast majority of small and medium-sized businesses. We know the corner coffee shop is no place to look for meaningful carbon reductions.

While I do not assert EPA is going to regulating the local Dunkin' Donuts, I do think the EPA's description that it will only apply to the largest sources is misleading.  EPA makes clear through out its preamble that the proposed 25,000 CO2e thresholds represents only a "first phase" of the rule.  This is because EPA believes the "absurd results" and "administrative necessity" doctrines, if applicable, only provide temporary relief from the Clean Air Act stated thresholds.  

EPA says that "if  variance from the statutory requirements nevertheless is necessary to allow administrability, the variance must be limited as much as possible." (preamble pg. 20). EPA describes the process in its preamble as follows:

The first phase, which would last 6 years, would establish a temporary level for the PSD and title V applicability thresholds at 25,000 tons per year (tpy), on "carbon dioxide equivalent" (CO2e) basis, and a temporary PSD significance level for GHG emissions of between 10,000 and 25,000 tpy CO2e.  EPA would also take other streamlining actions during this time.  Within 5 years of the final version of this rule, EPA would conduct a study to assess the administrability issues.  The, EPA would conduct another rulemaking, to be completed by the end of the sixth year, that would promulgate, as the second phase, revised applicability and significance level thresholds and other streamlining techniques, as appropriate. (preamble pg.2)

EPA contemplates taking "streamlining activities" vaguely referenced as changing potential to emit calculations as well as creation of general permits.  EPA also states "we expect permitting authorities to ramp up resources for permit issuance."  (preamble pg. 64).  Taking these actions will allow EPA to "bridge the gap between literal language and congressional intent", thereby making it possible to "include more of these sources" in the NSR and Title V program.  (preamble pg. 70).

As a result, EPA is clearly stating its intent that more and more sources fall under the NSR and title V programs by gradually reducing the thresholds over time down to the Clean Air Act statutorily established thresholds.  While EPA may state that their intent is to only gradually phase in smaller source over many years, the argument will be how quickly can "streamlining" techniques be implemented and more permit reviewers hired to bring more and more sources under the program. 

Therefore, EPA's proposed rule fails to set forth a policy statement that regulation of small sources of GHGs is illogical.  Rather, EPA states it needs more time and resources to bring these sources under the program.  By no means am I a defender of the status quo, but it is certainly fair to question whether this is the best approach to addressing climate change.